Student Loan Consolidation

There are two types of student loan consolidation to which student loan borrowers should pay attention.

Federal Student Loan Consolidation

If you have federal student loans, you may have different types of federal student loans with different due dates and interest rates.

When you have several federal student loan servicers, it can be a lot to manage.

Federal student loan consolidation helps you to organize and manage all of these disparate student loans into a single student loan known as a Direct Consolidation Loan.

In order to proceed with student loan consolidation, you must have a federal direct student loan such as a Stafford Loan.

When you enter student loan consolidation, what exactly happens?

With student loan consolidation, you don’t actually lower your student loan interest rate unfortunately.

Rather,all of your student loans are consolidated into a Direct Consolidation Loan and the resulting interest rate is a weighted average of the interest rates of your existing federal student loans.

For example, let’s assume you have a $12,000 loan at 6.5%, a $10,000 at 5.2% and a $18,000 loan at 4.5%.

Therefore, you have $40,000 of student loans with a weighted average interest rate of 5.93%.

With federal student loan consolidation, the federal government rounds up the weighted average interest of the Direct Consolidation to the nearest 1/8%.

Therefore, the interest rate for your Direct Consolidation Loan would be 6.00%.

So, with student loan consolidation, your interest rate is not lowered. However, you do receive the benefit of paying only one payment to one student loan servicer. It is much easier to organize and repay your student loans with federal student loan consolidation.

Private Student Loan Consolidation

As its names suggests, private student loan consolidation involves consolidation of your private student loans.

How does private student loan consolidation differ from federal student loan consolidation?

While federal student loan consolidation combines your existing student loans into a single student loan with a weighted average interest rate rounded up to the nearest 1/8%, private student loan consolidation takes a different approach.

Private student loan consolidation issues a new student loan and uses the proceeds to repay your existing student loans.

The benefit of private student loan consolidation is that your rate goes down.

Private student loan consolidation also lets you combine both your federal and private student loans together into one student loan, whereas federal student loan consolidation only allows you to combine your federal student loans.

Conclusion

When it comes to student loan consolidation, you have two options.

If you want to organize your federal student loans and pay only one student loan servicer each month, then federal student loan consolidation is a viable option. You also will have access to federal student loan repayment, deferral and forbearance.

If you want to lower your interest rate and combine your federal and private student loans, then private student loan consolidation, also known as student loan refinancing,